Pound/Euro rates recovered a little yesterday, rising from €1.09 to almost €1.10. It was not the start of a significant recovery for Sterling, but rather month-end flows in the currency markets supporting the UK currency. After 4 days of large drops for the Pound, it seems yesterday was a temporary bounce. This morning, the rate has started to fall again.
Brexit uncertainty in our view could cause the Pound to fall further. With Boris stating the UK will leave with or without a deal, the chances of a disorderly exit from the EU are increasing. As this is being priced into the market, Sterling is falling. We think a 45% / 50% chance of No Deal is priced in, so clearly there is room for the Pound to fall further should these chances increase.
Today at 12pm the Bank of England (BoE) will announce its interest rate decision. I think rates will be left on hold, but that the BoE will cut later this year. Pay attention to what the governor Mark Carney says in his press conference. If he hints that rates may be cut later in the year, the Pound will fall further. If however he eases expectations of interest rate cuts, it could lend the Pound some much needed support. It certainly needs it!
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Pound/US Dollar Forecast
Last night as expected, the US Federal Reserve (FED) cut interest rates by 0.25% as expected. It was the first rate cut since 2008, but wasn’t a surprise As my colleague Michael said in yesterday’s post, it was already priced into the value of the US Dollar. However we have seen the GBP/USD rate drop to almost $1.21 this morning.
Usually an interest rate cut would weaken a currency, but this move has actually strengthened the Dollar and made it more expensive, so what’s going on?
It’s partly because a 25% point cut was already priced in. There was also a chance that the FED would cut rates by 0.5%, but as they didn’t, the USD gained strength. Furthermore, the USD is a ‘safe haven’ currency. Due to trade war concerns, Brexit uncertainty, and tensions in the gulf, investors move to ‘safe havens’ in times of uncertainty. In the current climate this means a stronger Dollar.
GBP/USD rates could fall further due to the reasons outlined in my Euro report above. Brexit uncertainty and what the Bank of England say today will be the main moves for Pound/Dollar.
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